Mark Dampier: Playing India’s reform story

It has been 12 months since pro-business leader Narendra Modi and his Bharatiya Janata party hailed a landmark election victory in India, which spurred on a prosperous year for its stock- market. More recently the market has lost some ground although this appears to be a healthy correction following such a strong run. This period of market weakness has allowed fund managers such as Jupiter’s Avinash Vazirani to find better-value opportunities.

Under the new prime minister’s watch, Vazirani believes India is undergoing a real transformation. The falling oil price has recently provided a tailwind, particularly as oil imports account for 36 per cent of India’s total import bill. It has also allowed the government to remove costly fuel subsidies. At the same time, inflation has turned negative, yet interest rates remain at 7.5 per cent so the manager expects to see further rate cuts.

Elsewhere, domestic investors are returning to the stockmarket. According to Vazirani, the savings pool in India is $600bn each year although savers have not been putting much money into financial assets for some time. On average, over the past 20 years, 5 per cent of domestic savings has been invested in the market each year but only around 2 per cent was invested last year. He expects this figure to increase over time.

Another significant change taking place has been the rollout of biometric identification, which began a few years ago. This has helped towards Modi’s plan to provide a bank account for every Indian household (99.7 per cent now do). This means the government can pay benefits directly into these accounts, which are linked to the biometric identifications.

The new government has also recognised how poor the infrastructure is in India. Poor railways, for instance, means many goods perish on their way to their destination. With investment in infrastructure now rising, Vazirani has invested in companies such as Texmaco Rail & Engineering, the largest manufacturer of train carriages in India.

Modi has also worked towards improving the efficiency of the country’s civil servants, including ensuring they turn up to work each day. He has recently created a website – attendance.gov.in – which provides statistics on various government departments such as how many workers are currently at their desk.

He has also brought in reforms to cut out high-level corruption. Much of this corruption had been pushed into the housing market and Vazirani tells me this has led to a fall in house prices in Delhi by as much as 40 per cent.

While Vazirani takes into account India’s wider economic environment and the changes afoot in managing the Jupiter India fund, he also places emphasis on his outlook for individual companies. In his search of investable companies, he views cashflow as the most important metric. While the definition of profit can vary, he believes cash figures are difficult to fudge, making it a more reliable measure.

He seeks three types of company. First, entrepreneurial businesses, where he views himself as buying an individual’s vision of their company and the integrity of the management. Second, government-controlled businesses. In reality, bureaucrats and ministers are in charge of these businesses, so Vazirani’s focus is on how efficiently management execute what the bureaucrats want. Finally, he invests in the subsidiaries of multinational companies although he admits it can be difficult to get information out of these companies. They tend to give away little in fear you may pass it onto competitors.

The fund has a bias towards small- and medium-sized companies, where around 50 per cent of the portfolio is currently invested.

While China always grabs the limelight, India is changing faster than many people realise. A government that is pro-business and truly investing in its growth must surely make India one of the more attractive markets.

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